Thorsten Hens, professor of Finance at university of Zurich, on why “short-term” market speculation can last for years

Just interviewed Thorsten Hens, professor of financial economics at the University of Zurich and one of the top finance minds Europe, and we got into why financial markets are so difficult to understand, even when you've spent decades studying them.

He brought up George Soros and reflexivity. His example, paraphrased: the weather doesn't give a shit what I think about it. But if I think the AI bubble is about to burst, I might sell. If enough people do the same, that belief starts affecting prices. Your prediction can help move the thing you're trying to predict.

I brought up Keynes's beauty contest analogy, which I think gets at a really fun part of this. In the newspaper competition he describes, you pick six faces from a hundred photographs, and the prize goes to whoever comes closest to the average choices of everyone playing. So picking the faces you personally find prettiest won't necessarily get you anywhere. You have to think about what everyone else will pick, while they're also trying to work out what everyone else will pick.

And then you can keep going: what do I think other people think other people think? These are the higher-order beliefs we got into.

Thorsten drew a massively useful distinction: these interactions drive shorter-term market fluctuations, while fundamentals drive long-run growth, so value-investors still win long-term, BUT he points out that these speculative cycles can last years, which makes “short term” a slightly uncomfortable phrase if you're the one sitting in it.